Financial institutions require information regarding business entities in which they invest financial resources. There are well-established methods for obtaining information regarding large business entities. For example, information supplied by Dun & Bradstreet reports are very accurate, and thus financial institutions can make informed risk assessments and financing decisions with respect to large business entities.
However, conventional methods of obtaining information relating to small business entities are haphazard and do not yield accurate information. The lack of a system that can provide accurate information can cause lost economic opportunities for a small business entity that cannot obtain financing under conventional methods and for financial institutions that miss an otherwise viable business growth. A recent survey indicates that twenty-four (24) percent of small and mid-sized business entities are unable to obtain adequate financing. The lack of a system that can provide accurate information can also contribute to a waste of financial resources if a small business entity receives financing based on inaccurate information and then becomes bankrupt.
The financial market for small business entities is huge. The Small Business Administration estimates there are twenty-five (25) million small business entities. Furthermore, the number of new small business entities has been increasing tremendously in recent years as new technologies make it easier for individuals to start new businesses. Numerous people work either independently or with two (2) or three (3) other individuals as consultants, contractors and free lancers. The increased number of small business entities and the lack of a system that can provide accurate information regarding small business entities represent increased risks for financial institutions, as well as an increased number of lost economic opportunities. There is a greater need for a system and method that can provide comprehensive, systematic and accurate information regarding small business entities.
The large number of small business entities implies that any system attempting to provide accurate information needs to be able to manage and update a massive amount of information. The challenge is more complicated because a large portion of small business entities either fail or close. For example, in 1996, there were four hundred forty four thousand six hundred eighty one (444,681) new small business entities having one (1) to four (4) employees. In the same year, three hundred eighty nine thousand three hundred forty two (389,342) small business entities closed or failed. In fact, a turnover rate for small business entities equals approximately twenty (20) to (25) percent per year, which implies a complete turnover of a database storing information relating to small business entities in four (4) or five (5) years. A system attempting to provide comprehensive, systematic and accurate information needs to be able to track and update a tremendous amount of information.
In addition, because an owner of a small business that closed or failed is likely to start another small business entity, a system attempting to provide accurate information regarding small business entities needs to be also be able to provide information relating to the principals of small business entities or other people associated with the business entities, such as board members, executives, and guarantors of loans. A study indicates credit worthiness of a small business entity highly depends on its one or more principals. Accordingly, to be able to make an informed decision regarding a small business entity, information relating to its one or more principals is essential. Furthermore, small business entities often rely on guarantees extended by family members or friends of the owners of the business to obtain initial capital and/or financing required to extend the business. Thus, information relating to one or more guarantors of a small business entity is also critical in assessing credit worthiness of a small business entity. Accordingly, a system attempting to provide comprehensive, systematic and accurate information relating to small business entities needs to be able to provide information relating to the business, as well as one or more principals and guarantors of the business, as appropriate.
Furthermore, a system attempting to provide comprehensive, systematic and accurate information regarding small business entities needs to be able to ramp up fast to include information relating to virtually all small business entities in a given market and their principals and guarantors. The initial hit rate, that is, the percentage of small business entities about which information is requested and found in the system, may be low, for example, about thirty (30) percent. However, the system needs to be able to obtain a high hit rate, approximating, for example, ninety (90) percent, in a relatively short period of time, for example, within nine to twelve months, to attract financial institutions and prove its value to the institutions. If a system attempting to provide information relating to small business entities has a low hit rate, the system would likely be unattractive to financial institutions, and thus, would be unlikely to succeed.
There is a need for a system that can provide comprehensive, systematic and accurate information regarding virtually all small business entities in a given market, which information includes, for each business entity, its trade data and data relating to its one or more principals and guarantors. Such a system can enable financial institutions to make informed assessments of risks involved in providing financing to small business entities. Such a system can also foster new financial products and services for small businesses, thereby satisfying unmet market needs.